Supplier Relations in a Lean World

To eliminate waste and improve performance, you must challenge old assumptions about order quantities.

In a previous article, “Lean Thinking In Distribution,” (EW, Dec. 2006, p. 49), I outlined the case for the application of “Lean Thinking” principles in the wholesale-distribution environment. I summarized how Toyota, which gave birth to the Lean movement, was able to look at their entire operations and reduce waste.

I suggested that the best starting point is to recognize that only a small fraction of the total time and effort in an organization actually adds value for internal and external customers. All non-value-added activities and inventory assets — or waste — can be targeted for removal step-by-step. Eliminating the non-value-added activities and inventory is the greatest potential source of improvement in a distributor's performance. Additionally, I suggested that not all value is provided by your organization alone — by your business processes and people — and that you should be thinking about how suppliers also fit into the Lean Thinking approach. In fact, partnering and collaborating with their vendors is how Toyota was able to achieve their dramatic results. In this article we will focus on spreading lean thinking to suppliers.

In my client relationships, I'm often able to discover the following areas of “non-value” present in distribution environments:

Too much inventory — more than necessary to fill a “reasonable day's supply” of customer demand.

Outdated use of “economic order quantities” — a practice that pushes inventory into the distribution center (DC) or warehouse.

Product waiting around for movement — this results from the order processing chain of picking, checking, packing, manifesting, staging, loading, etc.

Over-processing — in the warehouse, this could mean over-checking.

Poor inventory control — finding a product becomes a treasure hunt.

Receiving, put-away, picking and shipping errors — they do have a cost associated with them.

Unused employee creativity — a waste of human resources.

These are not unfamiliar issues to many distributors. Some would say this is not necessarily rocket science, but that may be underestimating the case just a bit. Lean Thinking may not require abstract thinking, but it does take perseverance and attention to detail.

Challenging Old Assumptions

Consider reordering product more frequently. Frequent reordering of product from a vendor might seem antithetical to those who have spent their careers trying to reduce transportation costs or take advantage of a vendor's prepaid shipment terms. But it's a fact that more frequent ordering of product reduces the average inventory on-hand and the associated annual carrying costs (typically estimated at 25 percent to 36 percent of the cost of inventory). I am not suggesting you ask vendors to provide daily “milk runs,” and I recognize that most vendors are not located around the corner. But is it necessary to have two or three months' supply of a product on hand when you can have it delivered in two weeks or less? Lean Thinking suggests that you put in place a process that works toward a “sell one-buy one” result (assuming some safety stock for variations in demand). That approach is called “pull.” We may never actually reach that perfect promised land — we won't buy one egg instead of a dozen — but you can have a dramatic impact on what you need to stock to satisfy customer demand by ordering according to actual demand and fostering a continuous flow of product.

Enterprise resource planning (ERP) systems typically calculate a demand forecast (a daily, weekly or monthly usage average). Yet, I see buyers ordering multiples beyond what is really needed of a product or product line to meet the established prepaid order minimums. Even worse, I've seen safety stock and lead-time parameters raised, just to be able to generate sufficient purchases to meet those prepaid order minimums — this is “pushing” inventory.

Many of the ERP solutions in use today by distributors over-emphasize the use of “economic order quantities” (EOQs). Relying too heavily on EOQs results in large batches of inventory being “pushed” into our warehouses. At least 50 percent of the time these orders are more than you need to satisfy customer demand before the next inventory replenishment is received.

I've often questioned vendor “special deals” which involve accepting large quantities of product into inventory to obtain a discount or meet some previously agreed upon purchasing objective. This often occurs at year-end, maybe even just prior to a physical inventory.

The examples above can have a devastating impact on the total inventory investment and the potential for obsolescence, particularly when top-sellers are involved. Often, the immediate issue then becomes, “Where do I put it all? My primary stocking location won't hold it! It's an ‘A-item’ and I have to store it in the back of the DC or high-up on pallet racking…and I'll have to move it again later; otherwise we'll lose picking productivity!”

Of course, there is also the issue of the cost to accommodate this situation: possibly overtime, and the missed benefits of a smooth and continuous operational flow that allows product to move through the DC or warehouse faster. This flow also exposes internal bottlenecks that were hidden by the sheer volume of product received into inventory.

There is often a lot of talk about vendor-distributor relationships and how distributors and suppliers should be collaborating for mutual advantage. A client recently told me, “I want to leverage my volume with my vendors, but I'm also looking for a continuous flow of product based on what I am actually selling. If I could just get my suppliers to accommodate, I know my inventory would go down, and I believe service would not be negatively impacted. I might even consider paying a tad more per unit. I'm committed to service and flexibility; my suppliers have to be, also.”

My client never said the exact words, but what he was effectively saying was, “I want to take a ‘total cost view,’” his objective being to reduce total costs, including inventory costs, rather than any one cost element such as transportation. This is a deep question, just as deep as asking suppliers to reduce prices so you can be more competitive.

Distributors need to elevate this “lean-pull” approach to inventory replenishment as a visible and viable issue for discussion with suppliers. It has the potential to really connect the supplier to the distributor in a collaborative way. Then the distributor can focus on excelling at inventory replenishment at a level as close as possible to actual demand. The supplier's job, if they support “lean-pull,” is to examine their own processes and take some of the costs out of their own internal operations, reduce replenishment lead-time, etc.

As more distributors recognize that there is an advantage to transforming their distribution model to use centralized distribution centers, and expect a reduction in overall inventory needs as a major benefit, this will only heighten the need to foster more collaboration with suppliers.

Beginning to ask the right questions is a simple but effective approach to find the ways Lean Thinking can address these issues of inventory, cost reduction, profitability and customer service. To suppliers, the downside seems weighty, and convincing them will be no small task because so much as been invested in the way we do things now. A good starting point is to gain a common understanding of the mutual supply chain and distribution challenges between buyer and seller and seeing the issues from all sides. A Lean transformation will begin when the assumptions built into the fabric of the organizations and business processes at both the supplier and distributor levels are challenged. Confidence in taking additional steps will come with the growing sense that the relationship and collaboration is driving some change and mutual advantage.

Howard Coleman is principal of MCA Associates, a management consulting firm since 1986. MCA Associates works primarily with distribution companies seeking operational excellence. Howard and his staff of senior consultants focus on business process re-engineering, inventory and supply chain management, sales development and revenue generation, information systems and technology, organizational assessment and development and succession planning. MCA Associates can be contacted at their corporate office in Connecticut at (203) 732-0603, at their Florida Southern Regional Office at (561) 989-3221, or by email athcoleman@mcaassociates.com. Visit their Web site atwww.mcaassociates.com.